UPDATE: USPS-FedEx Deal Could Rein in Future Rate Increases

The $6.3 billion deal between the U.S. Postal Service and FedEx Express is expected to save the agency $1 billion a year and could hold down future rate increases, Postmaster General William J. Henderson said yesterday.

After months of speculation, the USPS and FedEx Express, the express shipping arm of FedEx Corp., Memphis, TN, formed a business alliance based on air transportation and retail business agreements. Under this alliance, the USPS will buy space on FedEx airplanes to transport Express Mail, Priority Mail and First-Class mail, and FedEx will locate overnight service collection boxes at post offices nationwide.

"Anything that improves service and therefore improves marketability is going to have an effect on suppressing rate increases," Henderson said.

Postal officials said an integrated national air transportation network with a highly reliable transportation supplier is needed to provide more reliable service, reduce costs and manage future cost growth.

"The postal service will gain a single air transportation provider for most of its Express and Priority Mail, which cannot travel solely by surface," said FedEx president/CEO Fred Smith. "FedEx will gain an expanded retail network to grow our business."

The agreement is nonexclusive, and, as a result, officials at United Parcel Service, Atlanta, said they would look into partnering with the USPS in a similar fashion.

So far, direct marketers are generally viewing the deal as positive.

"If having FedEx deliver Priority Mail and Express Mail and First-Class mail can lower the cost and keep the service going, we are entirely in favor of it," said Jerry Cerasale, senior vice president of government affairs at the Direct Marketing Association.

Bill Monk, outbound fulfillment manager, Nordstrom.com, Cedar Rapids, IA, said, "If the partnership is going to speed up and give the postal service more direct ability to put packages in the air versus on the ground and also give them the flexibility of having their own dedicated air fleet during the day that are FedEx planes, without a doubt that's going to help our service." Monk said most of Nordstrom.com's packages are shipped via USPS' Priority Mail and Express Mail.

However, Monk said he wasn't certain whether the agreement would have helped reduce the cost of the most recent rate case.

The deal is a step in the agency's evolution -- ordered by Congress -- into a more businesslike entity. Because Congress put restrictions on how the postal service can handle costs and rates, it does not have control over its organization the way FedEx or UPS does.

Under the agreement, the USPS will pay FedEx $6.3 billion over seven years for shared access to FedEx's national air transportation network. With more than 650 aircraft, FedEx is one of the largest airlines in the world. The transportation agreement, which will begin in August, will provide one integrated national air transportation network for the USPS.

FedEx Express will provide 3.5 million pounds of airlift capacity every day -- the equivalent of 30 wide-body DC10 aircraft. FedEx aircraft will carry predominantly unitized shipments, presorted by the postal service into sacks, trays, tubs or containers. Most shipments will be on FedEx aircraft that are currently idle during the day, though some additional aircraft and equipment may be needed. FedEx Express will hire new employees, including pilots, aircraft mechanics and cargo handlers, with the largest initial impact on Memphis operations. The USPS also can continue to use carriers other than FedEx.

The USPS has been searching for a company to handle its Express and Priority Mail. That job is primarily handled by Emery Worldwide Airlines, a unit of CNF Inc., Palo Alto, CA. But postal officials said the deal with Emery was inefficient and too costly. For example, the agency used Emery's sorting facilities instead of its own and used Emery's planes to handle the mail. With the FedEx agreement, the postal service will only rent space on FedEx's planes.

Postal officials estimated that with this agreement, delivering each pound of mail would cost two-thirds of what it does today.

The agreement comes on the heels a federal appeals court ruling last week denying a bid by Emery to block the deal. Emery spokeswoman Nancy Colvert would not comment specifically on the FedEx-USPS agreement, saying, "We can continue to pursue -- and will pursue -- appropriate legal action. Even if they implement the contract, we still could file suit down the road."

Under the second agreement, FedEx Express will have the option of placing a self-service drop box in every U.S. postal location. This nonexclusive retail agreement will be launched with an operational test in February. FedEx expects to place more than 10,000 drop boxes nationwide in the next 18 months and, over the life of the seven-year agreement, has the option to place thousands more boxes.

FedEx will pay annual fees to the USPS for drop-box placements. The estimated value of the agreement to the USPS could range from $126 million to more than $232 million, depending on the number of boxes placed. FedEx expects to produce $900 million in increased drop-box revenues.

Postal officials are not concerned that FedEx would take business away from the USPS, even though customers will be entering its facilities to use FedEx services.

"I don't think that the fact that a FedEx box is in the lobby necessarily means that people will stop using the postal service," Henderson said. "If I thought that, we wouldn't do the deal."

Smith said the agreement complements rather than cannibalizes their current business lines. For example, FedEx carries larger packages, while the postal service focuses on letters and lighter parcels.

Even after both service agreements take effect, FedEx Express and the postal service will continue to operate competitively. The USPS will not pick up or deliver any FedEx packages, and FedEx employees will not accept or deliver any U.S. mail. In addition, the two organizations have no plans to co-brand, and neither plans to alter current service features.

Though the deal stopped far short of several proposals that were considered, additional agreements are being pursued. Officials said a future deal may include the USPS using FedEx's sophisticated computer networks to improve the tracking capabilities of Priority Mail shipments.

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